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Mortgage tax relief changes for buy-to-let landlords set to come into force

Landlords' 2017-18 tax returns will be the first to fall under new regulations

Landlords are braced for cuts to their profits as the government’s mortgage interest tax relief changes are phased in from next week.

Originally announced in the 2015 Budget, the rules mean that when landlords file their tax returns for the 2017-18 tax year, the amount of mortgage interest they can offset against their tax bill will be reduced.

With this figure set to drop each tax year until it’s fully replaced by a tax credit for mortgage interest in 2020-21, investors could see thousands of pounds of potential profits wiped out.

Whether you’re a first-time landlord or a professional buy-to-let investor, you can get expert advice on your mortgage options by calling Which? Mortgage Advisers on 0800 197 8461.

What is mortgage interest tax relief?

Until April 2017, landlords could deduct all of their mortgage interest payments before calculating their tax bill, meaning they would be taxed on their profits rather than their overall turnover.

With the majority of landlords being on interest-only mortgages, this meant the savings on offer could be significant.

This is set to change, though. When investors file their returns for the 2017-18 tax year, due by 31 January 2019, they will only be able to claim tax relief on 75% of their mortgage interest. They will get a 20% tax credit on the rest of their mortgage interest payments.

In the following year, the relief will only be available on half of their interest, and they’ll get the 20% credit on the rest.

Mortgage interest tax relief changes explained

From the April 2020-2021 tax year, mortgage interest tax relief will be fully replaced by a tax credit limited to the basic rate of tax (20%).

For a higher-rate taxpayer, the tax credit is roughly half as generous. But it could be more punishing still, as it forces landlords to declare a higher income – which could push them into a higher tax bracket.

This threatens to wipe out profits for higher-rate taxpayers, and could mean some basic-rate taxpayers are pushed into the higher band.

The table below shows how landlords will need to claim tax relief on their mortgage costs as the new rules phase in:

Tax year

Mortgage interest deductible under old system

Mortgage interest qualifying for 20% tax credit under new system

2017-18 (filed by 31 Jan 2019)

75%

25%

2018-19 (filed by 31 Jan 2020)

50%

50%

2019-20 (filed by 31 Jan 2021)

25%

75%

2020-21 onwards

0%

100%

Mortgage interest tax relief changes for higher-rate taxpayers

The table below shows the extent to which landlords who are higher-rate taxpayers could be affected by the changes.

In this example, we take a landlord who receives £950 a month in rent and pays £600 a month towards their mortgage.

Before the 2017-18 tax year, this landlord would have made a profit of £2,520 a year, but as the tax credit is phased in, their taxes rise and their profits fall. By 2020-21, this profit will be reduced by nearly 60%, to just £1,080.

Tax year

Tax bill

Profit

2017-18 (filed by 31 Jan 2019)

£2,040

£2,160

2018-19 (filed by 31 Jan 2020)

£2,400

£1,800

2019-20 (filed by 31 Jan 2021)

£2,760

£1,440

2020-21 onwards

£3,120

£1,080

Should landlords set up a limited company?

As they seek to counter taxation changes, some landlords have set up limited companies for their investment properties.

Indeed, the specialist broker Kent Reliance claims that 70% of buy-to-let mortgage applications in the first nine months of 2017 were made via limited companies, up from 45% in 2016.

While setting up a company will help you avoid tax relief changes, it’s certainly not the right move for everyone.